For over a decade, registered salespeople have sought the right to incorporate. Many other professionals most notably those selling insurance—have been able to do so for quite some time. Though not legally able to incorporate, many salespeople assign commissions earned on the sale of securities to unregistered corporations.
But this approach, unless properly structured and documented, may lead to inquiries—or worse—from the Canada Revenue Agency. A working group of provincial and territorial government officials recently published a consultation paper outlining three options that would permit the incorporation of salespeople, together with a list of questions and a request for comment. The working group has taken extra care to point out that no securities regulator or SRO has endorsed any of the options, suggesting quick adoption of any option is highly unlikely without exertion of considerable political pressure.
While a specific rule of the Mutual Fund Dealers Association of Canada prohibits sales representatives from redirecting commissions to an unregistered corporation, the MFDA has repeatedly suspended the application of the rule over the years with the approval of some provincial securities regulators. In fact, many jurisdictions have recently approved a change to the rule that allows the redirection of commission payments to a non-registered corporation.
This alone may not be enough to address the CRA’s concerns: Registered salespeople sponsored by IIROC dealers do not have this ability, while exempt market dealers and scholarship plan dealers do. It is not clear what a salesperson of a dealer that is both an EMD and a mutual fund dealer can do with commissions earned on exempt products or products sold on an exempt basis.
The hesitation to allow the incorporation of salespeople is rightfully due to concerns that incorporation could shield an incorporated sales representative from personal liability to their sponsoring dealer and clients, and perhaps diminish regulators’ enforcement and other powers.
Regardless, registered salespeople should be allowed to incorporate. Other professions where losses from failure to meet applicable standards can result in significant harm—including loss of life—are permitted to incorporate. Proven measures and approaches can be adopted to ensure that incorporated salespeople remain subject to liability claims of clients and others that they may harm through act or omission. The monitoring, enforcement and disciplinary powers and obligations of sponsoring dealers and regulators can be maintained.
As the question of incorporation has been outstanding for over a decade, as most notably discussed in the CSA’s 1999 Distribution Structures Committee Position Paper, we may have to keep waiting for a head of steam to build to get this initiative moving down the track.
Richard E. Austin, counsel at Borden Ladner Gervais LLP, with the assistance of Emily Fan, student-at-law, Borden Ladner Gervais LLP.